The following charts show why printing/borrowing and spending our way to self-sustaining prosperity has failed, and why it will continue to fail, with eventually catastrophic results: the returns on this unprecedented borrow-spend policy are diminishing to near-zero or negative.

Humanity has an innate attraction to conspiracy and complexity. Humans have been selected to seek patterns in Nature and in the behavior of the humans around them. No wonder humans are drawn to detective stories, puzzles and conspiracies.

While conspiracies are indeed a part of the human experience, focusing on human intent and collusion can distract us from the impersonal systems that dominate economic history.

In a similar fashion, an obsession with complexity distracts us from what is blindingly obvious. Just as the alcoholic refuses to admit his addiction lest he be forced to tackle his self-destruction, so too do we avoid the financially obvious lest we be forced to surrender our ardent hope that the increasingly fragile Status Quo we depend on is enduring and secure.

As long as the interest rate on debt is low, the path of least resistance is to keep borrowing to support politically untouchable fiefdoms, cartels and constituencies. Eventually, the cost of servicing the debt overwhelms the diminishing returns on the debt-based spending.

Let's start by admitting the unprecedented rise of government debt in the past decade.Here is the Federal debt, not including the bogus inter-governmental debts (mostly money owed to the illusory Social Security Trust Fund).

Everyone knows Federal debt has skyrocketed, but so has the debt of state and local governments: state and local government debt has risen by 250% just since 2002.

GDP includes government spending; this vast expansion of debt-based spending has had a very modest positive impact on GDP:

Courtesy of longtime correspondent B.C., here are five insightful charts. The first displays the ratio of GDP minus government spending to total Federal debt. This reveals the effect of massive Federal borrowing on the private sector--the non-government part of the economy.

When the line is rising, private GDP is expanding even as Federal debt increases. Thus the private economy expanded smartly from 1959 to 1973 while the Federal government ran relatively modest deficits. If we look at the first chart above, total Federal debt, we see that it was basically flatlined in this period--the deficits of this period barely moved the needle on total Federal debt.

As Federal deficits and debt increased in the 1980s, private GDP was negatively impacted. Only the twin speculative bubbles of the late 1990s to mid-2000s (dot-com and housing) reversed the trend. Once the housing bubble popped, the effect of rapidly rising Federal debt has had a very negative correlation to private GDP.

It's even worse when state and local government debt is added:

What is the correlation of rapidly rising Federal debt and money supply? It appears ballooning Federal spending/debt no longer boosts money supply much:

As B.C. observes: The purchasing power of wages is in freefall vs. the growth of debt-money. Increasing Federal debt and spending is not boosting wages.

The effect of rising government debt on wages has been declining for 40 years, a trend interrupted only by brief speculative bubbles.

Meanwhile, massive Federal borrowing and deficit spending has opened a structural deficit of monumental proportions: anyone claiming this is sustainable or healthy is either in a drunken daze or mesmerized by Cargo Cult magical thinking.

As government borrowing and spending skyrocketed since 2002, household income flatlined during the housing bubble and then fell off a cliff as the State-enforced financialization of the economy hollowed out household wealth and income. In a Central State/cartel capitalism system like America's, the cost basis for both enterprises and households constantly rises, pressuring wages lower for the majority of wage earners. We see this clearly on this chart:

Ballooning government deficit spending and debt have a negative effect on private GDP, money supply, money velocity and wages. Printing money does not make us wealthier, nor does borrowing and squandering money on consumption and malinvestment make us wealthier.

That which we sow now we shall reap later.

NEW VIDEO: A DELUSIONAL & DYSFUNCTIONAL STATE (29 minutes, 25 slides)

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

There are of course various distinctions that must be made within each broad class, but the point is the financial health of the nation ultimately depends on creating surplus value--value in excess of the costs of production and overhead.

Wealth that is incapable of generating new wealth is consumed, i.e. eating our seed corn: once the investable capital is gone, it is no longer available to leverage new wealth creation, and the nation spirals into poverty and conflict.

The key metrics are value creation and cost: assessing the value created by each class and the costs of maintaining each class.

In the conventional view, the wealthy subsidize the poor via taxes and donations to charity (i.e. noblesse oblige). But the conventional framework ignores the key question of where the wealthy obtained their fortunes, and the consequences of that wealth acquisition on the larger economy.

If the wealthy parasitically skimmed their wealth, they are in effect depriving the economy of capital that could have been productively invested elsewhere. If they created value far in excess of the costs of their enterprise, then they were conduits of high-value creation.

Here is a snapshot of parasitic wealth skimming: the financial aristocracy skims roughly 5% of the nation's entire output (GDP) from the 60% of the populace that are debt-serfs (the top 5% have wealth that is not debt-dependent, and the bottom 35% are too poor to have any credit).

Financial profits per capita (per person): this eliminates the abstraction of numbers in the hundreds of billions of dollars by measuring the parasitic skim extracted from each American:

The financial sector is only the most visible part of the parasitic skim; most of the skim is hidden within cartels enabled and enforced by the Central State (Federal government).

Correspondent Mark G. has identified the two dead-giveaway characteristics of parasitic cartels:

2. The cartel enforces a socio-political agenda that has nothing to do with the ostensible purpose of the cartel's operations.

This describes the national security cartel, the sickcare cartel, the higher-education cartel and the drug-war/gulag cartel, to name just the most obvious.

The national security cartel absorbs hundreds of billions of dollars annually, yet the value of trillion-dollar weapons systems like the F-35 are rapidly diminishing in an era of networked drones.

The sickcare cartel now absorbs almost 20% of the nation's entire economy (GDP) yet the health of the populace measurably declines by most international metrics.

The higher-education cartel manages to expand its share of the national income even as the cartel's output--the relevancy and value of its product, a college degree-- is increasingly marginalized. (Students: You Are Exploited Debt-Serfs April 12, 2011)

Overcrowded classes now routinely view coursework on large screens that is drawn from the Internet rather than live lectures--lessons the students could get for free on their own. Textbooks that cost $150 each (how's that for cartel pricing?) cover material that is also available online for free or a very low cost. Meanwhile, administration costs are replacing instruction as the primary costs of the cartel:

No wonder higher education and healthcare are "rights." That agenda guarantees the cartels' control of the national income will only expand.

The drug-war/gulag cartel consumes billions of dollars annually on suppressing marijuana and jailing drug users and nickel-bag dealers, while fully legal and readily available alcohol kills tens of thousands annually via vehicle accidents, murders committed while intoxicated, liver disease, etc., none of which can be traced to marijuana usage.

Forgotten thanks to the relentless drug-war/gulag cartel propaganda is the fact that U.S. physicians routinely prescribed cannabis in the late 19th as a cure for a variety of common ailments. (For the record, I am not a user attempting to justify my usage; this is simply unassailable historical fact.)

Since the value created by these cartels is far less than their costs, they are all part of the parasitic aristocracy skimming wealth rather than creating it.

As noted in the previous essays on employment, once an economy's cost basis rises above the value created by most labor, it is no longer financially possible to pay people to perform low-value creation work.

What we need to consider is what happens as the parasitic and dependent classes take an ever-larger share of the national surplus while the classes creating most of the value decline in size and political influence.

This has nothing to do with what people "deserve" or what they've been promised; it has everything to do with what is economically sustainable. The conventional political discussion is focused on what everyone is receiving; the discussion that matters is how much value is being created, and can that wealth support a parasitic aristocracy, politically untouchable cartels and a vast and growing class of State dependents.

Based on income and taxes paid, it appears the high value creation class has shrunk to around 20% of the workforce, as the top 20% pay roughly 80% of the income and payroll taxes.

In general terms, there are 150 million people reporting earned income, i.e. working at some sort of job or self-employment. Roughly 38 million are part-time, and so full-time workers number around 112 million. As noted in Why Employment Is Dead in the Water, 38 million American workers earn less than $10,000 per year, a number that aligns with the number of part-time employees; 50 million earn less that $15,000 a year and 61 million earn less than $20,000 annually.

In broad-brush, the bottom 40% of wage earners work in low-value creation jobs. Their wages are capped by the value their labor creates. The top 20% are in high-value creation jobs and the middle 40% fill the spectrum between $100,000 and $21,000 a year in earned income.

Looking ahead, we can discern a time when the class creating most of the value and paying most of the taxes declines to the point that the value created is no longer large enough to support both a parasitic aristocracy and a vast class of dependents (children, retirees, disabled, unemployed, etc.) while the majority of wage earners are barely getting by on their declining household incomes. Recall that there are about 307 million Americans and roughly a third have living-wage jobs, i.e. full-time jobs.

That sets the stage for a titanic political battle--one that could trigger a constitutional crisis--between the parasitic aristocracy, the dependent class and the two classes creating value with their labor.

In this context, America is filling the gap between the value we create and what we spend by borrowing $1 trillion+ a year on the Federal level and hundreds of billions more on the local-government and private-sector levels. All this debt isn't being "invested" in new value-creation; it is funding consumption and cartel skimming on a monumental scale.

NEW VIDEO: A DELUSIONAL & DYSFUNCTIONAL STATE (29 minutes, 25 slides)

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Monday, January 28, 2013

If we understand the simple dynamics of value creation, total compensation costs and the cost-basis of doing business (general overhead), then we understand why employment isn't coming back in the U.S.

It is impossible to understand job creation without understanding value creation and labor/overhead costs. People hire other people when their labor creates more value than it costs to hire them.

When labor costs are high, the value created must also be high; it makes no sense to hire someone if doing so generates a loss.

When labor is cheap, the bar of value creation is lowered, and so the risk of hiring a worker is also lower: they don't have to add much value to be worth their wage.

This is why you see many low-value jobs in developing-world countries. There are night watchmen on duty in virtually every parking lot and building in urban Thailand, for example; these workers are providing a fundamental value, "eyes on the street," but it is a low-value proposition: no special skill is required other than being a light sleeper. The cost of their labor is equivalently low, but in a low-cost basis economy such as Thailand's, a very low wage is still a living wage.

In a self-employment example, many vendors in urban Thailand set up their informal food stall (a cart or a tent) for a few hours a day. Their net income is low, because what they provide--readymade food and snacks--is available in abundance, i.e. there are many competitors.

Nonetheless, because the cost basis of life is relatively low, modest earnings from a low cost, low-profit enterprise make the enterprise worthwhile.

Compare that with the typical government job in the U.S. or Europe. It is difficult to measure the true cost of government pension costs, as local governments do their best to mask their pension costs and inflate their pension funds' projected returns. But a back-of-the-envelope calculation yields about a 100% direct labor overhead cost for the typical government job with full healthcare, pension and vacation benefits. So an employee earning $50,000 a year costs $100,000 in total compensation expenses.

Many local government employees on the left and right coasts earn close to $100,000, so their total compensation costs are roughly $200,000 per worker.

How much value must be created by each employee to justify that compensation? Government needn't bother itself with that calculation, as the compensation is not set by market forces and the revenue stream can be increased via higher taxes, junk fees, tuition, licences, permits, etc.

As the legacy costs of healthcare and pensions for retirees become due, local government operating budgets are being gutted to pay these ballooning legacy costs.

As a result, it is now impossible for many local municipalities to fill potholes: it makes no sense to have $100,000/year employees performing low-value work like filling potholes. Put another way, there is a labor shortage in high-overhead government bureaucracies because after paying for legacy pension costs, there is no money left to hire more people at $100,000 a year in total compensation to fill potholes, a job that might be worth $35,000 in total compensation.

The value created by government employees filling potholes is completely out of alignment with the cost of their wages/benefits. If employees cost $100,000 (recall that their annual earnings may be $50,000--we must always use total compensation, not wages as reflected on pay stubs), then in effect all work that generates less than $100,000 in value can no longer be done.

This is why cities and infrastructure are falling apart. Once you raise the cost of compensation far above the value being created by the labor, then most lower-value but nonetheless essential work (e.g. filling potholes) becomes unaffordable to accomplish.

We can understand this dynamic very clearly in a private-sector example. Let's say a high-tech start-up pays its programmers $90,000 a year, with minimal benefits. The total compensation costs of each programmer are thus around $125,000 annually.

Now let's say that the owners are very egalitarian and they pay everyone they hire $90,000 a year ($125,000 in total compensation costs) regardless of their skills or how much value their labor creates. Does it make sense to pay someone $125,000 a year to empty the trash cans in the office? No, it does not. So the trash doesn't get emptied. Does it make sense to have a $125K/year worker being a go-fer, typing correspondence and making copies? No, it does not.

Those menial tasks are pushed down to the programmers and managers, who must do those tasks themselves on a need-only basis.

The new hire is expected to create $200,000 of value annually (the minimum output of value needed to keep the company afloat) or they must be let go, or the firm will lose so much money it goes belly-up.

Now let's say that the local minimum wage law sets the minimum total compensation costs of any employee at $40,000 annually. For example, $25,000 in wages and $15,000 in direct labor overhead (healthcare, disability, workers comp, vacation, 401K pension contributions, etc.)

What is the value created by an administrative assistant who makes copies and empties the trash cans? Let's say the value added is $20,000 a year. At $40,000 per year minimum cost, it makes no sense to hire a "low-cost" worker because the value created by that worker is not even close to their total compensation costs.

As a result, the job of administrative assistant is not just unfilled--it vanishes. It makes no sense to hire workers when the value they create is less than their compensation costs.

How do we measure value created? The most accurate way is to let the market discover the value of the work performed by raising the price of our goods and services to reflect the value added.

Does our product or service become more valuable if the trash in our office is emptied? No; so the trash is not emptied, as the labor cost only raises the cost-basis and lowers gross profit, thus increasing the risk of insolvency.

The same can be said of all sorts of overhead: from healthcare costs that rise far faster than the company's revenues, expansive offices, higher junk fees and taxes, higher energy costs, and so on.

In a global economy, the value added by labor is measured on a global scale. As the overhead costs of healthcare, energy, office rent, local government junk fees, etc. keep rising, each worker in the company must produce more value just for the firm to generate enough gross margins to pay overhead costs and stay solvent.

If overhead costs--the cost-basis of doing business in the U.S.--keep rising faster than gross profits (out of which overhead is paid), then the owners have little choice: they can either close the business before they are personally bankrupted, cut everyone's pay or lay off some employees and somehow raise the productivity of the remaining workers to maintain enough value creation to survive.

This is the U.S. economy in a nutshell. If we understand the simple dynamics of value creation, total compensation costs and the cost-basis of doing business (general overhead), then we understand why employment isn't coming back in the U.S.

RE: THE WEEKLY MUSING REPORTS: If you have subscribed but did not receive the 1/26/13 Report, please email me. If you were receiving the Musings in 2012 but did not get this week's Report, you need to resubscribe or contribute $50 for 2013, using the links below. Thank you for your support and understanding.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Sunday, January 27, 2013

Employment is dead in the water because opportunities for organic expansion are few and the cost basis of doing business in the U.S. keeps rising.

Let's start by reviewing the basics of employment in the U.S. Courtesy of the St. Louis Federal Reserve, here is the non-institutional civilian population of the U.S. (Note that the Civilian Non-institutional Population With No Disability, 16 years and over (LNU00074593)--roughly speaking, the workforce of the nation-- is 215 million).

Here is the percentage of the population with some kind of job: note this could be self-employment that earns $1,000 a year or a job with 4 hours a week; recall that 38 million American workers earn less than $10,000 per year, 50 million earn less that $15,000 a year and 61 million earn less than $20,000 annually. All these numbers are drawn directly from Social Security Administration payroll data.

Here is real (adjusted) gross domestic product (GDP), which includes government spending: (in other words, as you borrow-and-blow trillions of dollars, GDP rises).

Unfortunately, employment hasn't risen along with the population or the GDP: the only metric with any meaning is full-time employment, as self-employed and part-time jobs may pay a few thousand dollars a year and should not be included in the same category as full-time jobs.

In sum: the population and GDP have both expanded smartly since 2000, but full-time employment has barely edged above levels reached 13 years ago.

Academic economists and political progressives would have us believe that the only thing restraining employers from hiring millions more people is lack of access to cheap credit.

The explicit assumption here is that cheap credit is all employers need to expand their workforce. This is so out of touch with reality that it beggars description.Progressives and academic economists generally claim the Federal Reserve's zero-interest policy (ZIRP) and its other policies of flooding the economy with liquidity "are working," i.e. boosting the economy.

Here is what the Fed's policies are boosting: financial sector profits Please compare this chart with the chart above of full-time employment, and then decide where the Fed's free money/easy credit is flowing.

Here are financial profits per capita:

The only way to understand why employment is dead in the water is to stand in the shoes of a potential employer or entrepreneur. Remarkably, this perspective is unknown to economists and progressive politicians because they have never been an employer (and no, hiring a grad student to grade papers or an illegal nanny to watch your kids does not make you an employer.)

I have described this vast divide between small business employers, entrepreneurs and the self-employed and those working in government or Corporate America as one of the least explored social/economic divisions in the nation.

Those who have spent their careers in government or academia have little idea what it takes to hire more people. Number one is a business with strong demand for one's products or services. In a developed world with too much of everything except energy, that is no small challenge: the world is awash in over-capacity in every field except niche industries such as deepwater oil rigs.

Second, you need a process that generates so much value (specifically surplus value) that you will generate immediate profits by hiring more people.

If the value added by additional labor is low, then you have no reason to hire more employees, even if Ben Bernanke personally knocked on your door begging you to borrow a couple million dollars at low rates of interest.

If an additional unskilled worker will cost $10 an hour and might generate $100 a day in additional gross revenues, that is $20 in gross profit. But the overhead costs of operating a business are rising faster than inflation: junk fees imposed by cities, counties and states, workers compensation and disability premiums, healthcare costs (if you hire full-time workers), energy costs, and so on.

For most businesses, overhead costs 50% to 100% of total employee compensation--wages plus benefits and payroll taxes. So adding another employee to gross 20% more doesn't make it worthwhile--it actually generates a loss once overhead costs are paid.

The only time it makes sense to hire another worker is if that worker will create 100% or more surplus value from their labor. For example, a worker paid $200 a day in total compensation generates $400 more in gross revenues--enough to not only support the added overhead but net the business a profit.

In a global economy, competition constantly lowers the premium most businesses can charge. That places most businesses in the vice of declining gross margins and higher labor/ overhead costs. The only way to stay solvent is to grow revenues and slash costs so declining gross margins are still enough to pay the bills and leave some return on capital/time/risk invested.

Cheap credit doesn't create surplus value, increase gross margins or get rid of over-capacity. It is a financial non-sequitur for all but a relative handful of enterprises. The only firms interested in borrowing money for expansion are those relative few in sectors that are not burdened with overcapacity. That might include oil services, network security and a handful of others.

But high-margin sectors such as technology either get funding from venture capital or their high margins generate enough income to fuel expansion without taking on debt.

The only companies borrowing vast sums of money are those paying off higher-cost existing debt with new cheap-credit loans. The savings from lower interest payments don't flow to new hires, they flow to the bottom line and from there to executives, owners or stock buybacks that boost the portfolios of institutional owners.

Employment is dead in the water because opportunities for organic expansion are few and the cost basis of doing business in the U.S. keep rising. That vise forces businesses large and small to reduce labor costs while boosting productivity. There is no other way to stay solvent in a post-bubble, over-capacity, over-indebted consumerist economy awash in too much of everything but energy, common sense and fiscal prudence.

RE: THE WEEKLY MUSING REPORTS: If you have subscribed but did not receive the 1/26/13 Report, please email me. If you were receiving the Musings in 2012 but did not get this week's Report, you need to resubscribe or contribute $50 for 2013, using the links below. Thank you for your support and understanding.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

At this critical juncture of entwined sympathies and the intimacy of repressed emotions entrusted to another, three things happened in the house on Green Street, only one of which Ross and Alexia detected.
They both heard the upstairs neighbors clump up the staircase to the third-floor flat, and their arrival caused Alexia to clear her throat and blush slightly as she felt obligated to warn Ross that he might well be awakened by the late-night amours of the couple above, who in their desperation to have a baby seemed to have hit on midnight as the best time to conceive—but only if they made a hellacious commotion during the mating.
Ross looked down at his empty plate circumspectly at this warning, and sighed that he had not shared a bed with a woman since his divorce four years earlier, and his envy for the lucky man was both unadmirable and unavoidable.
Alexia's pulse quickened at this confession, for not only was this affable man available, his romantic disappointments paralleled her own.
The second occurrence—the arrival of Robin and Kylie downstairs—passed undetected, which was the intent of the stealthy young lovers. Having enjoyed a delightful Italian dinner with Robin rather than visit Ross as she'd promised, Kylie whispered instructions to Robin to open the door as soundlessly as possible. He was happy to comply, for he hadn't even asked her to join him in his studio; she'd accompanied him without comment.
Closing the door behind them, the pair slipped off their shoes and then Robin kissed her before she could take a single breath.
"I know we agreed that if you ever came to my door, something would happen," he whispered delicately. "But that was foolish, and I just want to say how wonderful today has been with you."
In the dark, there was just enough light from the streetlamps filtering through the batik curtain to make Kylie's large soft eyes glisten. "A deal's a deal," she whispered. " I came to your door, and now the agreed upon something has to happen."
The private joke further bound the quivering young pair, and she embraced him so her lips nearly touched his ear. "Are you sure you don't need to protect me when that something happens?"
"The test result is over there," he replied. "Would you like to read it first?"
"If you don't need it, then you don't need it," she whispered, and then they rejoined their kiss. Her white dress rustled softly as it slipped to the floor, and Robin had the wildly romantic vision that this was like their wedding night; setting aside their first peculiar lovemaking, this was like their first full night together.
Unbeknownst to Robin or his lovestruck young paramour, or to the other two couples engaged in intimate conversations above them, a third event had occurred in the house on Green Street. Many prayers had been issued in the house recently; indeed, many prayers had been sent, spoken and unspoken, for many months from that address: for conception, for love, and for a healthy squalling baby.
The pixies of romantic procreation are a skeptical lot; they are not roused too easily, but once roused, they commit to the task at hand with unequalled fortitude.
After hearing the prayers emanate from this old house for so long, the pixies concluded the humans issuing the prayers were indeed sincere; and so that evening, as the sun set and the spirit world awakened, they flew in great numbers to the big house on Green Street.
Now in our feeble human imagination, all creatures of the spirit world are knowing and careful; but the spirit world is not omniscient, and many of its various inhabitants have the same flaws which humans once attributed to their old discarded gods of Olympus. The pixies are easily confused over exactly which humans issued exactly which prayer; and once committed, they are more concerned with being liberal with their magic than with its sparing application.
And so they descended on the house in force, and in short order sprinkled each of the three couples with a heavy coating of their magical dust. It was, after all, great fun to see the humans take to each other so hungrily, and to know that each was having their hearts' greatest desire fulfilled that very night. All life must be constantly renewed, and the pixies knew they were part of the Larger Scheme of Things; and since none of these human females had any offspring, it was clearly the right and proper course to answer their prayers.
Two had prayed only for love, while the third had prayed ceaselessly for conception; but the pixies had only the one magical dust, for romantic conception, and this they applied most liberally to the entire household.
The magic hit Kylie and Robin the moment the pair stepped into his studio; Ross and Alexia were doused just as Ross confessed his availability and romantic loneliness; and Janson and Dorrie were struck just as Dorrie announced that they should wait until tomorrow, as her temperature wasn't quite right. Janson announced he was tired of the scheduling which had failed so spectacularly to date, and that romance was reason enough; and as he followed through on his pronouncement Dorrie for once failed to insist that they stick-to-the-schedule.
The pixies only failure was on the second floor; for when Alexia realized she was attracted to a man she barely knew who was far from her idealized inner portrait of a life companion, she suddenly announced that she'd looked forward to a shower the entire drive home. After giving voice to her gratitude for the fine meal and wine, she left for her bathroom, leaving Ross to clean up the kitchen and wonder what, if anything, he might have said to trigger her abrupt departure from what had been a very pleasant and increasingly warm conversation.
Though Alexia was successful in rinsing the day's film of failure from her glowing skin, the pixies' magic could not be washed off. And in their annoyance with her recalcitrance, the small bathroom fairly buzzed with pixies; the moment she finished toweling herself dry, the spirit world's harbingers of romantic procreation filled the air with a glittering cloud of gold which fell on Alexia like heavy-flaked snow.
Of course Alexia was unable to see the pixies douse her again and again in a golden whirlwind; she only felt the stirrings of imagination and the relinquishing of her usual judgments. Perhaps she'd dismissed this attentive man too quickly; even if he wasn't life companion material, hadn't it been rather more than nice to have a man at her table who’d not only listened to her, but fed her extraordinarily well?

Thursday, January 24, 2013

Ours is a dysfunctional debt-based Empire that buys the complicity of its debt-serfs with entitlement bread and circuses.

The road to debt-serfdom is paved by the banks and enforced by the Central State.If there is any point that is lost on ideologues, Progressive and Conservative alike, it is this: the first-order servitude and second-order tyranny of debt-serfdom can only occur if the banks' power is extended and protected by an expansive Central State.

Progressives are blind to the State's essential role in creating and empowering a parasitic financial Aristocracy, and Conservatives are blind to the tyranny of debt-serfdom imposed by the private-sector financial Aristocracy, i.e. the banking sector.

Answer these questions before reaching for your ideological blanket:

1. How many banks would loan penniless, near-zero-income students $100,000 if the State did not backstop and ruthlessly enforce its parasitic, exploitive "student loan" programs? Answer: none.

The consequence if the tyrannical State ceased to enforce the debt-serfdom of Student Loans: the Education Cartel would collapse in a odoriferous heap, and the banking Aristocracy would be stripped of a highly profitable State-run business.

2. Under what conditions would banks originate mortgages if the State did not guarantee mortgages via FHA and the other socialized-mortgage agencies? Answer: 30% to 35% down, hefty points and a higher rate of interest than FHA loans.

We can find the answer by examining the conditions banks demand for non-State backed loans. If the State wasn't backstopping the risk, what bank would be insane enough to originate a 30-year fixed mortgage at 1 point over official inflation and a negative rate when measured in real inflation? It makes no sense without State subsidies and guarantees.

What percentage of the mortgage market is purely private, i.e. not backstopped by FHA et al.? About 5%, and the terms of these private loans are considerably stiffer than those originated under the taxpayer-funded umbrella of FHA.

In other words, debt-serfdom is not possible without the State enabling and enforcing the banks' power. Blaming the banks for imposing debt-serfdom is like blaming the junkie for picking up a free bag of smack or a shark for wolfing down a seal: the banks will pursue the fattest, easiest profits out of basic self-interest, just like the rest of us.

If the banks can capture the State's regulatory and political machinery for a modest investment in bribery (oops, I mean political contributions, lobbying and revolving-door positions), then why wouldn't they do so?

The problem is thus not the banks' power, it is the State's power, as the State confers and enforces the banks' power.

There is precious little evidence that anyone in the current political Aristocracy has read the Federalist Papers, other than to pass an exam, and more's the pity. That a State run by people whose grasp of American history extends all the way back to the previous election cycle (or in extreme cases, to the Reagan era that began in 1981) is dysfunctional is unsurprising.

Madison feared both a central bank and a presidency that morphed into a functional monarchy. Madison's fears of a central bank were shared by his decidedly non-Federalist friend Thomas Jefferson, whose vision of a rural, localized America generally ran counter to the Federalists' keen awareness that a strong central state was necessary to provide for a defense of the nation and to act as an impartial enforcer of transparent markets and a prudent money/credit system.

(I say generally, as Jefferson was persuaded to execute the Louisiana Purchase, a decidedly Federal project of expansion, and he kept the Bank of the United States intact under his able Secretary of the Treasury, Albert Gallatin.)

The proper role of the Federal government in Madison's view was to act as a "disinterested and dispassionate umpire between different passions and interests."

In my analysis, the political Aristocracy running the U.S. has fulfilled Madison's nightmare, as it effectively operates a monarchical Empire on the Roman model.Though Louis XIV of France famously held that "L'etat, c'est moi"-- the state, it is me-- in the Roman and British empires, the monarchy/emperor system was a functional oligarchy in which the supposedly absolute monarchy/emperor had to consider the views and interests of the aristocracy.

A monarchical Empire is thus operated by a small aristocracy with a shared world view (i.e. Empire) and a very limited spectrum of opinions: that is the American Central State in a nutshell.

Alexander Hamilton, also a Federalist, understood the critical role of credit in fueling innovation, expansion and trade. He favored a central bank that issued sound money and prudent credit, on the 1780s Bank of England model. That the central bank would become the subservient handmaiden of private investment and commercial banks was incomprehensible.

Here is what has been lost in the debt-serf America we now inhabit: Albert Gallatin observed that America's rapid, diversified economic development resulted from "the absence of those systems of internal restrictions and monopoly which continue to disfigure the state of society in other countries."

If only our "leaders" read or understood Madison, Hamilton and Gallatin. But alas, they are supremely ignorant Oligarchs through and through, pleased to enforce debt-serfdom and then buy the complicity of the serfs with Federal entitlements and subsidies.

That too is the Roman model: a dysfunctional debt-based Empire ruled by a self-serving Elite which buys the complicity of its serfs with bread and circuses.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Wednesday, January 23, 2013

A mere dozen points describe both the global financial illness and the cure.

The global economy is ill, and everyone who is not mired in denial or a paid shill knows it. Saying it's healthy doesn't make it so.

Is is possible to usefully generalize the illness and outline a cure in a few points?Maybe not, but let's try anyway.

1. Creating and selling credit and leverage became far more profitable than generating goods and services. Financialization--expanding highly profitable credit by leveraging assets and income to the hilt--began in earnest in the early 1980s.

Creating credit is equally easy in fractional reserve systems like the U.S. and command economies like China. Creating leveraged instruments is as easy as writing and selling derivatives, which not coincidentally have risen (in notional value) 700% since the mid-1990s.

We can understand financialization with just two charts: Here is real GDP, up 50%:

Here is total credit market debt owed, up 200%:

Though solid data is hard to come by, financialization is not just more profitable in nominally capitalist America--it is also true in nominally communist China. Real estate speculation is simply the expansion of credit via building phantom assets.

2. The financial sector captured the regulatory and political mechanisms of the Central State. This capture is both direct (buying political relief from regulation, etc.) and indirect: once the market becomes dependent on financial profits, then any threat to those profits threatens the market and thus the wider economy.

Politicians, capitalist, socialist and communist alike, all cave in as soon as economic growth is at risk.

The capture was also ideological. In the West, neoliberal policies (loosening regulatory controls, reducing the size of the State, enabling free flow of capital, etc.) produced huge gains in growth in the initial low-hanging-fruit stage. This gave the ideology real-world credence.

In China, the "to get rich is glorious" slogan embodied an entire ideology of a State-managed market economy that was as dependent on financialization as the West. (In China, financialization is hidden in land deals and loans made by local government and private wealth-management credit/leverage that is off the books.)

When the bubbles burst, they devastate not just the financial sector but the entire economy, which has become heavily dependent on speculative bubbles and continuous expansion of debt and leverage for its growth.

4. The only "cure" that doesn't cause political pain is to lower interest rates and flood the economy with liquidity, i.e. cheap money, to reflate a new credit bubble in another asset class. If there are no other asset classes available, then the Central State and Bank will try to reflate the existing bubble (for example, real estate in China).

5. Speculative credit bubbles (neoliberal or command-economy) led to systemic mal-investment and mis-allocation of capital. Suddenly selling autos for a loss to reap the financing fees made sense, as did building McMansions in the middle of nowhere and building more steel mills in China, even though the sector is already plagued with monumental over-capacity.

6. The Central State and Bank responded to the popped speculative credit bubbles by recapitalizing insolvent banks with taxpayer money (or claims on future taxpayers, i.e. bonds) and legitimizing phantom collateral/assets. It is absolutely critical to understand that the political Status Quo will "buy" growth at any price, and as a result the State is blind to the consequences of massive mis-allocation of scarce real capital in mal-investment.

In other words, the State and Central Bank will continue to do more of what has failed spectacularly until they can no longer do so.

The ultimate counterfeited collateral/asset is a sovereign bond. Here is the basis of the claimed legitimacy: "We can always pay the interest on this bond because we have the unlimited power to tax our citizenry, and we will always return your capital because we have the unlimited power to create money."

Yet if we follow the consequences of these two unlimited powers, we find nations taxed into poverty and currency debauched to a shadow of its former value. How exactly does ruining the economy and currency create legitimate collateral?

The State also legitimizes phantom capital by manipulating stocks and bonds higher and allowing real estate to be marked-to-fantasy or kept off the market.Only a transparent, open market can discover the price of an asset and thus its value as collateral for debt, and destroying or limiting the market's ability to price assets undermines the legitimacy of all assets and collateral.

7. The Central State and Bank attempted to repair the speculative credit bubble machine by diverting income from the productive "real" private economy to the parasitic financial sector and politically powerful but grossly inefficient cartels and State fiefdoms.

8. The demographics of an aging population and shrinking workforce cannot support the promised entitlements and other State spending. This has been covered in depth in many places, including this blog--for just one example of dozens:Demographics and the End of the Savior State (May 17, 2010).

That's the core of the disease in 8 points. Here is the 4-point cure:

1. Re-take the regulatory and political machinery of the State from the control of the financial sector. As long as the State and Central Bank's actions are primarily aimed at sustaining debt bubbles and spreading the losses generated by the financial sector to the rest of the economy, the State and the economy are doomed to implosion: Is the Central State Too Big to Fail or Too Big to Survive? (January 22, 2013)

2. Mark every marketable asset held by every financial institution and corporation to market at the close of each day, including mortgage-backed securities and real estate. This will reveal the "too big to fail" banks around the world as insolvent.

3. Liquidate the insolvent banks in an orderly fashion by auctioning off all of their assets on the open market. This will eliminate the shadow inventory of housing and expose phantom collateral.

4. Relieve the State of all obligations other than being an impartial enforcer of transparent markets, open competition and common-sense regulation to protect the common good and public commons. As I explained in The Grand Tradeoff of Risk/Innovation/Growth and Financial Security (January 21, 2013), the security of State guarantees and promises is illusory: the State can only sustainably spend the surplus generated by the private sector.

As the private sector crumbles under the dead weight of a parasitic financial Aristocracy, the debt-serfdom of financialization and corrupt, inefficient State fiefdoms, the economy can no longer support expanding State obligations and debt.

The citizenry will have to accept that promises issued on the basis of delusional, unrealistic projections of endless growth and debt expansion must be renounced, just as debt based on phantom collateral must be renounced.

Were these four points implemented, the re-set would be difficult but brief, as truth, trust and resilience would be restored to the political and financial systems. Once political and financial resilience has been restored, fixing all the other problems we face enters the realm of the possible. Without these 4 fixes, the system remains brittle, fragile and doomed to implosion.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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